Spring Airlines leads China’s budget race with cost curbs

ReutersA Spring Airlines crew member talks with flyers on a plane at Hongqiao Airport in Shanghai. Staff at the low-cost airline are required to use both sides of a sheet of paper before discarding it to keep a lid on costs. File photo: Reuters

Beijing - The chairman of Spring Airlines requires his employees to use both sides of a sheet of paper before throwing it away and even removed most of the bulbs lighting the corridor to his office in a quest to keep a lid on costs.

China’s first low-cost airline has been profitable since 2006, its first full year of operation, but the budget aviation market is about to get a lot more competitive as the government moves to promote low-cost travel to meet a surge in demand from an increasingly wealthy population.

Over the past 18 months, Spring has been joined by two new competitors. China’s big state-backed airlines are also looking at launching budget carriers, a strategy industry executives say would be an additional boon to plane makers Airbus and Boeing.

The Civil Aviation Administration of China (CAAC) plans to add nearly 80 airports by 2020, including a $14.5 billion (R151bn) second airport in Beijing, and is urging others to expand to handle budget airlines.

The initiative, industry observers say, would usher in a new era for low-cost carriers in a country where one in four people travelled by air last year. That number is set to rise to almost the whole population in the next two decades, Airbus executives say, with China to replace the US as the largest aviation market in that period.

“There will be a number of new entrants,” Andrew Herdman, the director-general of the Association of Asia Pacific Airlines, said this week.

“We know that model works well for short-haul flights elsewhere. There is no reason it shouldn’t work well in China.”

For Wang Zhenghua, the founder and chairman of Spring Airlines, progress has been slow. After nine years, the Shanghai-based carrier still struggles to get prime landing slots at Beijing Capital International Airport, causing Spring to rack up 80 million yuan (R135m) in total losses on a route that has been highly profitable for the wider industry.

“We only get to land in Beijing either early in the morning or late at night,” Wang said. “Slots are pretty tight, but unfairness and discrimination are the main issues here.”

Beijing is home to Air China and a critical hub to other state-backed carriers. The CAAC recently pledged to assign slots to all airlines in a fairer way.

Unlike Europe, where budget carriers control half of the short-haul market, Spring booked about 11 million passengers last year, or less than 5 percent of the China market.

Pilot shortages, limited airspace and regular delays have held back growth, industry executives say, while fast and affordable rail also poses a threat. China’s State Council announced last week that it was speeding up construction of railway lines.

The low fares and no-frills model was pioneered by Southwest Airlines in the early 1970s and successfully emulated by Ryanair, AirAsia and easyJet.

“The growth potential for low-cost carriers is huge because China has a big population and many people have never taken a plane,” Wang said. “Our clients can be anyone who is price-sensitive, it’s not just wage earners.”

In November last year Wang Junjin, the chairman of privately owned Juneyao Group, set up Jiuyuan Airlines, a budget carrier based in Guangzhou, southern China.

HNA Group, the parent of Hainan Airlines, converted its West Air unit into a budget airline at the end of 2012. Based in Chongqing, it flew 3.3 million passengers last year, with a load factor of 90 percent, 10 percentage points higher than the industry average.

More competition may mean more margin pressure. Spring Airlines has a 10 percent profit margin, higher than the industry average of 8 percent. Wang puts its success down in part to stringent cost curbs: all staff, Wang included, must fly on heavily discounted tickets or take trains for business trips. – Reuters

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